Author Archive

October 1 marks the 61st anniversary of the founding of the People’s Republic of China. For Chinese, 60 years represent one cycle in the Chinese calendar, which gives this 61st anniversary special significance.

For the first 30 years of the People’s Republic, China was dominated by Mao’s presence and his emphasis on politics and political movements at the expense of almost everything else. In the beginning, the political campaigns began as an inconvenience, but gradually became more extreme, culminating in the Great Leap Forward and Cultural Revolution, which permanently scarred Chinese society in very profound ways. The next 30 years after Mao died were largely about bringing China up from poverty and healing those wounds.

The period from 1978 till today, from an economic development point of view, are a huge success. China has risen from beggar nation status to one of the world’s wealthiest if measured by cash reserves. The Chinese government speaks with a new confidence, which often comes across as worrying, especially to its neighbors in the region, such as Japan, India and the members of ASEAN. In the Chinese officially controlled media, there are endless reminders of how much the government has done to raise Chinese standards of living, and frequently vilifying any criticism of official policy. The official line is that everything will be fine if China continues on its current path of development.

The only problem is that no one in China really believes that continuing previous policy will work. Chinese, through their actions, have made it very clear that they want more than just a higher standard of living and economic growth. Frequently, they feel that they are victims of corrupt local officials who have abused their power to enrich themselves. Furthermore, the system does not have checks and balances through which people can make appeals for justice. Since all political, legislative and executive power is dominated by one institution which has 79 million members, there are no other channels for the average Chinese citizen.

Until now.

In today’s China, the only system which permits some kind of appeal and checks and balances is the Internet. One of the most interesting stories in China which most foreign observers have missed is how the Chinese, in their own very ingenious ways, have adapted the Internet to fit their needs. In a previous article, I talked about how Sina’ s adaptation of Twitter, Sina Weibo, has become a tool for digital petitions to the Beijing central government, completely circumventing corrupt local officials. This presents a special challenge to Sina editors who are in charge of censoring content in real-time on Weibo on the government’s behalf. If they allow the content to go out, it will spread rapidly, creating a huge number of followers and supporters. If they suppress it, they will seem like they are working in collusion with corrupt local officials.

What are they to do?

In another instance, a Chinese author published a novel online, and was arrested and jailed for publishing pornographic content. Many Chinese came to his defense, and in the face of protests which came ONLY on the Internet, the author was released. Please note: because it is very hard for protesters to organize in the real world, Chinese are organizing to protest on the Internet. And they are doing it very successfully.

So, when Google and other western companies protest censorship in China, they really miss the big story. The Chinese Internet represents a channel for Chinese which they have not had before in the first 61 years of the People’s Republic. It represents a channel for protests and representations which did not exist during Mao’s lifetime. And it is VERY effective. This power comes from the Chinese people and their ability to swiftly organize on the Internet.

Google’s failure to grow significantly in China is based on its failure to understand how the Chinese would develop the Internet to suit their own needs. Sina is a company which is under very tight Chinese government supervision, yet they developed Sina Weibo. Why couldn’t Google have developed it? My guess is that Google’s management wasted so much attention and cycles on the government censorship issue that they failed to spot any other opportunities in China.

And western political pundits who support more freedom for Chinese miss the point by complaining about the Great Firewall of China. Most of the sites outside the GFW are in English anyway, a language the vast majority of Chinese just are not interested in. Instead of building more tools to go outside the GFW, they should focus on building tools to make it easier for Chinese to express themselves on the Internet within China. Ironically, Sina has done a much better job at this than Google.

Looking to its next 60 years, it is plain to see that economic development at the expense of everything else will not be sufficient to satisfy most Chinese. They want accountable government and freedom to express their ideas, and to live in dignity. Only when Chinese have free access to information will Chinese society become truly modern.

In Chinese folk legend, a popular story is that of Judge Bao who lived nearly 1,000 years ago. Bao Zheng made it into legend as an incorruptible investigative magistrate, determined to find the truth regardless of obstacles, and to swiftly punish the guilty, usually by beheading. He was so trusted by the emperor of the time that he was empowered to punish the guilty by death without first reporting to, and asking the permission of the emperor, even when he executed members of the court and the ruling family. This was because he had the full trust of the emperor; he knew that even though some of his decisions would anger him for a while, and some members of the ruling family would criticize Judge Bao at court and scheme against him, Judge Bao was in fact acting in the best interests of the emperor and the dynasty.

Even though Judge Bao has been dead for nearly 1,000 years, he continues to be a folk hero among the poor. By pursuing justice in spite of obstacles set in front of him, Judge Bao showed that the emperor, and the Northern Song Dynasty, were in fact dedicated to justice. While there were corrupt local officials committing unjust deeds, this was not institutional, and if it could be uncovered by Judge Bao, he would act to punish the evildoers and rehabilitate the victims, regardless of the consequences. So popular did he become that he has become the subject of many traditional Chinese operas over the centuries. By showing that he was dedicated to justice, he also protected the legitimacy of the emperor, because among the Chinese peasantry, tolerance of corruption by the emperor would have undermined the legitimacy of the whole dynasty, eventually leading to its overthrow.Unfortunately for Chinese, characters like Judge Bao are rare; maybe that is why he is held up as a hero. More often than not, corruption among local officials is the norm. But within corruption, there are different levels of corruption.

In China, power has always radiated from a central point, with very little in terms of local power centers at the village, county, provincial levels. If they do have power, as they have had over the past thirty years, it is because they have been granted it by Beijing at the government level. Most of this power was granted, or divested to, in the early years of China’s reforms when Beijing was, for all practical purposes, bankrupt. Local officials were effectively told that they were on their own, and had to raise money by whatever means they had. In virtually all cases, local governments and officials were able to raise investment money from land developers and investors through their control of land use rights. By changing farm land to industrial or residential use, they were able to raise huge amounts of money, and were often able to pocket large portions of the payments into their own private accounts.

Now though, Beijing is much stronger, and there are signs that Beijing wants its power back. From Beijing’s point of view, conditions have changed, and many local officials have abused their power, fostering corruption and abuse of power, sometimes even to the point of threatening the legitimacy of the whole government. Some of the more egregious acts of local corruption have in fact been good for Beijing, since they support Beijing’s case for taking power back from local officials. Like everything else in China though, it is a knife which cuts both ways.

A recent case which has attracted nationwide attention to local corruption has been eviction of a family in Fuzhou in Jiangxi province from their residence. Three members of a family doused themselves in gasoline and set themselves alight after being offered less than market value compensation to move out in order to make way for a bus terminal. continue »

As a consultant in software product development, I have followed trends not only in software development, but in other businesses as well. Software is one of those businesses which changes fairly quickly, since its main output is code. When software engineers decide to retire code or a standard, that code is said to be deprecated. In short, it is no longer supported in the current version, though it may be in previous versions. One of the major reasons for poor performance in consumer software is the support for deprecated systems and code; this causes a performance hit.

With the rise of the Internet, more service work is easily done in remote locations and time zones. This change is most common among software developers, many who work in other locations and are never seen in any office, but continue to contribute. It is also happening in the field of writing and reporting; I write for Forbes.com The China Tracker and Business Insider; but I have never stepped inside their offices. There simply is no need to.Michael Pettis, an economist and observer of the Chinese economy, has made the criticism that China’s party, government and technocrats have invested too much in export production capacity, while Chinese consumer spending is actually shrinking as a percentage. This is all happening at a time when the rest of the world is looking to the Chinese consumer as the last hope for the global economy. Definitely, this is not a good sign.

The intrinsic problem is that China has become too dependent on its own state-owned enterprises to maintain growth and employment at all costs following the events of September 2008. Because they were so huge and had ready access to capital from the state-owned banks, they were able to keep China’s economy growing, even while the rest of the world headed into a funk. Nearly two years later though, cracks in the dike are beginning to appear. continue »

When it comes to Internet and mobile application development, it is often said that the most popular model is called C2C, which stands for “copy to China.” In simple terms, this boils down to copying a successful application in the west, such as YouTube (Chinese versions include Tudou, Youku and Ku6), Facebook (whose Chinese versions include Kaixin and Renren), Twitter, which has become a hit application for Sina.com in the form of Sina Weibo (which means mini-broadcast) and for copycats of Foursquare, the hit location-tagging site for mobile phones.

But there is another aspect to the C2C model which accounts for its success: Facebook, Twitter and Foursquare were blocked by the Chinese government’s Great Firewall of China (#GFW) first. Before they were blocked, all of these applications had large numbers of users in China. In the case of Facebook, there were a large number of users in China before it was blocked, starting with westerners in China, but then spreading to local Chinese users. After it was blocked, Chinese local user numbers fell off precipitously; this helped the new Chinese copycat applications to grow in numbers, while the original western applications retained users who were mainly from the west who preferred using English and had access to a VPN which gave them access through proxy servers.

In economics, this is called import substitution, which means that the importing nation replaces a necessary import with a product or service which is made domestically, creating jobs in the local economy. In China’s case, this has frequently meant acquiring access to key technologies, and in order to get access to the technology, the Chinese government, in a few rare cases, has been prepared to give access to the Chinese market. continue »

The prevailing wisdom among Western marketers is that the rise of the Chinese consumer offers new and exciting opportunities in this very exciting market, the only major market that is still showing rapid growth. If only they could get the Chinese government and let them have direct access to the Chinese consumer, then there would be millions, even billions to be made selling to these newly rich shoppers!

This approach has never appealed to me. It’s too simplistic, and those who believe it usually don’t know anything about China, or the role of government in China’s officially-controlled media. While there are structural problems in the online advertising industry in China, they can be solved through clear initiatives with Chinese government support and good ad agency training.

The problem now is that most of the ad agencies’ management are not clear about which way the industry is heading, and have this “deer in the headlights” look about what is happening. The list of western media failures in China, losing millions, even billions in the process, goes on and on. The reason for this is simple: the Chinese government knows very well how important message control is, and they are not about to cede control of it. Unfortunately for advertisers, they do not have control of any key technologies that they could transfer to the Chinese government in exchange for access to Chinese consumers. So they are stuck.

Compared to many Western advertisers, I look at the Chinese advertising market differently. Instead, I think “What if the Chinese advertising market is not behind the West, but is actually ahead in some ways, and can give us indications of how the Western advertising market is likely to change?”

China just passed a new milestone: it consumes more energy than the United States, which had been the world leader ever since energy consumption started to be measured. Twenty years ago, such a milestone would have been marked with unabashed pride, but in today’s energy-conscious world, it is not a good threshold. From now on, when it comes to global warming, pollution and related issues, China will no longer be able to hide behind its claims of being a developing nation.

On the policy level, the Chinese government has to perform a delicate balancing act, it has to balance the desire of many Chinese to live a Western lifestyle, together with its high energy consumption and waste, with the need to preserve the environment, since China, and the world, would suffer enormous damage if 1.3 billion people got all their energy needs from coal and oil, the two most widely used fossil fuels. China’s political and social stability depends on finding the right balance, since the party has an implicit mandate: it will deliver economic growth to the Chinese people.

This is why the Chinese government has chosen to invest in developing new green energy technology.

Apple has said that it plans to open 25 stores in China by the end of 2011. Apple’s message is clear: “We have the product lines and now the bandwidth to devote our full attention to the Chinese market, and we intend to build a major market presence in China.”

The Apple offensive in China will be led by the iPhone, because mobile phones are nearly ubiquitous in China, and are important status symbols. The iPhone interface is considered to be particularly user-friendly and easy to use. The second wave will be led by the iPad, the new iteration of the notebook computer which has been breaking sales records worldwide. Then come the iPod and iPod Touch for music and entertainment fans who don’t need a phone, or who just want to try out the Apple platform at a lower price point. The final wave, which is directed at computer users who need a real full-function computer will be the MacBook Pros. Put simply, Apple has a full line of products at different price points for different users in China.

Standing in the opposite corner is Google’s own mobile operating system, the Android. Just like Apple, HTC and Motorola have been going through rapid iterations of their hardware, and have been adding more apps made for the Android platform. In the U.S., many analysts feel that the open Android platform will ultimately catch up with and overtake the iPhone.

When it comes to revenue on the U.S. Internet, it has traditionally come from three sources:

Display (banner) advertising;

Search advertising, made popular through Google Adwords;

E-commerce, with Amazon.com being the most outstanding success story;

The collapse of display advertising revenue for leading companies such as Yahoo!, which at their peak relied on large banner buys and campaigns from new Internet startups accounting for 1/3 – 1/2 of total income, was the single greatest cause of the popping of the Internet bubble in early 2000.

Lately though, something different has happened. These are:

The rise of social game publishers, led by Zynga;

The rise of group-buying, lead by Groupon;

In contrast to the U.S., online games have been popular in China since 2002 when Shanda Online Entertainment popularized the South Korean fantasy game title “Legend” in China. Almost single-handedly, that title made Shanda the single most successful IPO in 2004. Later, Shanda used its IPO cash to buy other studios and titles, becoming the single largest gaming network in the world.

A large reason for the success of online games in China was because consoles such as Nintendo’s Wii, Sony’s Playstation and Microsoft’s xBox were never popular in China. A combination of high console prices, fear of game piracy on the part of publishers and government policy opened up an opportunity for online gaming.

In the U.S., Zynga has grown just as fast as Shanda, seemingly coming out of nowhere. Like Shanda, it is becoming a network too, leveraging the popularity of Farmville among many social game players. One could argue that Zynga is like Shanda, except it is starting from the U.S. market.

If 2010 is anything, it is the year the Internet went mobile. In the U.S., the fast acceptance of the iPad, and then the iPhone 4, has shown that what was missing was not people’s willingness to go mobile, but the lack of good mobile infrastructure and user-friendly products. Now, Google’s Android mobile OS has joined the fray, offering Apple good solid competition, and offering consumers a wealth of products to choose from.

Ever since Google launched Adwords in June 2002, the company has become a literal cash machine, offering consumers everywhere the capability, as advertisers, to launch highly targeted ad campaigns globally. Now, Google text ads are almost ubiquitous and for some people, they have even become a nuisance. For Google, the challenge is keeping its income from search high, even as the users switch to accessing the Internet on the go. Will the changes in use habits from the desktop and laptop, to the mobile phone, mean that they use search in a fundamentally different way?

Looking at the Western media today, I can’t get over the huge amount of ink praising how efficient the Chinese government model is when faced with challenges, while damning the inefficiency of most Western governments. While it is easy to find fault with almost all Western governments, it is wrong to think that the Chinese government is all run by brilliant geniuses with engineering degrees (instead of MBAs or law degrees).

Recently, the Chinese government published a white paper on the Internet, praising its value and contribution to society. My question is this: “If the Internet is such a great new tool, and indeed represents the ‘crystallization of human wisdom’ (a term used in the white paper), then why didn’t it get its own new ministry?” continue »